What happens when Medicare controls costs too well

There's one school of thought that says Congress is incapable of controlling costs in Medicare, and then there's, well, this:

Want an appointment with kidney specialist Adam Weinstein of Easton, Md.? If you're a senior covered by Medicare, the wait is eight weeks.

How about a checkup from geriatric specialist Michael Trahos? Expect to see him every six months: The Alexandria-based doctor has been limiting most of his Medicare patients to twice yearly rather than the quarterly checkups he considers ideal for the elderly. Still, at least he'll see you. Top-ranked primary care doctor Linda Yau is one of three physicians with the District's Foxhall Internists group who recently announced they will no longer be accepting Medicare patients. ... Doctors across the country describe similar decisions, complaining that they've been forced to shift away from Medicare toward higher-paying, privately insured or self-paying patients in response to years of penny-pinching by Congress.

One of the dirty little secrets of the health-care system is that Medicare has done a much better job controlling costs (pdf) than private health insurers.

The problem is that Medicare can't control costs too much better than private insurers or, as you see from the article above, doctors will simply abandon Medicare. In a world where there's only Medicare and Medicare decides to control costs, doctors can either take the pay cut or stop being doctors. And as we see from other countries, lots of people want to be doctors, even if being a doctor doesn't make you particularly wealthy. But in a world where Medicare is just one of many payers and Medicare decides to control costs, doctors can simply stop taking Medicare patients and a lot of legislators will lose their jobs.

This isn't well understood. In fact, the dominant opinion is that Medicare can't control its spending. A lot of this, as far as I can tell, has to do with the failure of the Medicare Sustainable Growth Rate, which looms oddly large in punditry on this issue. The Medicare SGR was a small formula that Republicans inserted into the 1997 Balanced Budget Act that was meant to save a bit of money -- $12 billion over 10 years, or 3 percent of the bill's Medicare cuts, to be exact. The formula was wrong, and it quickly required massive cuts that would destroy the program, and that the SGR's authors never intended. So congresses controlled by both parties have repeatedly kept them from going into effect.

Meanwhile, the SGR formula actually has cut costs in Medicare dramatically. The cuts have been less than the flawed formula would've demanded, but vastly more than would've been likely in its absence. As James Van Der Water and Jim Horney document, the byproduct of the compromises required to keep the formula's cuts from taking effect is that "the reimbursement rate for physicians next year will still be 17 percent below the rate paid in 2001, adjusted for subsequent increases in the costs that physicians incur in providing services as measured by the [Medicare Economic Index]." This is why physicians are so upset. Meanwhile, the vast majority of Medicare cuts passed in the last 20 years have been implemented as scheduled.

It's remarkable how your paper has been pushing the need for entitlement cuts both in editorials and front-page stealth-editorials, but when confronted with actual cost reductions they're suddenly worried about "penny-pinching by Congress". What is that sort of phrasing doing in a news story anyway? Another stealth-editorial dressed up as objective news.

One of the silliest things about Obamacare is the notion that millions of new patients can be added to the system without significantly increasing the number of doctors, nurses, hospitals, etc. and costs will decrease.

Although I think they did drop the "costs will decrease" part of the fantasy, they're still not admitting that subsidizing insurance will not necessarily lead to access to services.

Unless we make slaves out of our physicians, train a whole lot more, or recruit them from abroad, costs will never be controlled. And all three options lead inevitably, it seems to me, to a decline in quality and a two tier or multi tier health system. Not unlike the UK.

bgmma50: physician salaries make up about 20% of healthcare expenditures. Cutting physician reimbursement should be on the table, and it is, as the ACA makes some cuts to fees for diagnostic radiology and other services. Physicians have 100,000's of dollars in salary they can lose before they become "slaves."

However, where the ACA makes it major cost savings is in the other 80% of the pie, including cuts to Medicare and Medicare Advantage and roll-back of the employer healthcare subsidy. That's the 80% of costs you're completely ignoring in your post. And of course, there's a large number of cost-saving ideas, such as the exchanges and new reimbursement strategies, that are in the bill but weren't scored as cost-saving because they haven't been proven to work.

"In a world where there's only Medicare and Medicare decides to control costs, doctors can either take the pay cut or stop being doctors. And as we see from other countries, lots of people want to be doctors, even if being a doctor doesn't make you particularly wealthy. But in a world where Medicare is just one of many payers and Medicare decides to control costs, doctors can simply stop taking Medicare patients and a lot of legislators will lose their jobs."

That may be why countries with a single payer system spend so much less, for more effective health care than we get!

Um, CarlosXL, how much money in Obamacare for new hospitals, equipment, clinics, nurses? How are you expecting to add millions of new people into the same provider system and reduce costs? Even if those unproven exchanges work perfectly, they won't reduce the cost of services, at best they'll make the market for insuring against those costs a bit more competitive and more widely available.

ACA's "cuts" to Medicare and Medicare Advantage shifted money, didn't save it. And the roll-back of the employer healthcare subsidy was laughably inadequate.

"We could do worse. In fact we are doing worse, for higher cost, than other advanced countries."

Under Obamacare we will do even worse and for higher cost.

Ezra posted a bit a few weeks ago about the demise of one of Britain's premier activists for public healthcare. I researched her. She herself used private healthcare. Nobody in Europe actually uses their public healthcare systems if they have the option of using private healthcare. Which is where we will end up.

"And as we see from other countries, lots of people want to be doctors, even if being a doctor doesn't make you particularly wealthy."

Yeah, I know quite a few people who want to be doctors. Of course, they couldn't ace that pesky organic chemistry thingie, and some of that other hard science stuff was really a drag, but maybe now they'll get their chance.

interesting graph. Another interesting one would be the corresponding number of physicians accepting Medicare or if (as some would admit above) they wouldn't stop accepting altogether but drag out the services they provide because of insufficient (in their eyes) payment schedules. So IF a public option was enacted with medicare rates or medicare +5% or whatever Ms. Nancy wanted how long would Dr Weinstein's patients within that public option be waiting for an appointment? Would those millions that would go into those public plans force the Dr Weinstein's of the country to abandon public medicine forever?

As note above, it would be useful if you would also provide a graph showing what percentage of physicians accept Medicare, and how it has changed over the years. Except, it would be a pretty boring graph, because it is my understanding that about 97% accept Medicare. Even the cases of the ones who bleat about it, such as in the referenced article, are self-reported to the media - we don't know what they really are doing. I find the geriatician who is supposedly limiting his Medicare practice to be an especially suspicious case.

I also have read that total Medicare payments to physicians have actually increased substantially during the period that payment growth was being reduced, since they simply perform (or at least, bill for) more procedures.

Ezra, do you really think like this? "The problem is that Medicare can't control costs too much better than private insurers or, as you see from the article above, doctors will simply abandon Medicare."

Since you're a foodie, think about it like this- if Medicare sets the price for a steak dinner at $25, I can't get a $50 steak dinner with Medicare. Maybe the $50 steak dinner isn't really worth $25 more (according to your "Labor Theory of Value"), but some people are willing to pay for it. What should emerge is a system where I could use $25 from Medicare and pay $25 out of pocket (or with supplemental insurance) for my steak or I could go to the $25 steak place used as a pricing benchmark (assuming we've abandoned labor theory of value at this point). Of course, what we've seen is that doctors are willing to take very low margins, and even losses, on smaller numbers of patients that have insurance with lower reimbursements- sometimes because they are actually good people trying to help others!

The problem is the assumption that Medicare should be able to pay for any doctor. It shouldn't! It's not that private insurance necessarily is overpaying, although it probably is, due to the way they are legally limited to pursue profits with a percentage limit which encourages them to juice the base costs. It's that in a real market (like in food, cars, etc.), we would expect that the best options would not be affordable by all.

Klein thinks he can control the cost of Big Macs by having the government pay less for them than private citizens are required to pay. For a while, McDonalds goes a long with the idea, because it's a guaranteed, and large (with volume), income. But the government, in trying to reduce its own expenditures, continues to try to force the price lower, and even starts making "suggestions" about what goes into making a Big Mac.

Eventually, the "Big Mac" is a day old plain White Castle burger, costing a good bit more than the original Big Mac cost, and real Big Macs are almost impossible to find, even if one can afford to buy them.

One of the reasons I expect the Health Care law to be unsuccessful at controlling costs is centralized cost control via things like the Medicare Advisory Board is more vulnerable to the effects of lobbying than a market based approach like Wyden-Bennett would have been.

"Eventually, the "Big Mac" is a day old plain White Castle burger, costing a good bit more than the original Big Mac cost, and real Big Macs are almost impossible to find, even if one can afford to buy them."

Health care often doesn't follow the rules of supply and demand. The greater the number of physicians per capita in an area doesn't mean medical costs are lower as compared to areas with fewer physicians per capita, i.e. urban vs. rural.

Other than on the cost side, what gov't can do is to put resources into researching how competent doctors can be trained at lower cost. Other developed nations with better overall quality of health care train their physicians and nurses at lower cost than the U.S. Perhaps if doctors didn't come out of med school with over a quarter million dollars of college loan debt, they would be more inclined to treat patients other than those with Cadillac-care health insurance coverage.

To use your "Big Mac" analogy, the gov't can assist whoever makes this hypothetical "Big Mac" in finding innovative and more efficient ways of making a "Big Mac." Gov't R&D has led to many innovations in the past. Why not in the process of producing competent medical practitioners?

Cost control is when you find ways to make care less expensive, and can therefore enjoy the same margin at the same or less level of revenue (for Ezra and those like him with a lack of simple accounting knowledge, 'margin' is the difference between revenue and cost).

Medicare has done nothing to 'control cost' in that sense. All they have done is impose price controls, and that leads to doctors dropping Medicare patients when the revenue side (i.e., Medicare reimbursement) does not keep up with the cost-side (salaries for their office staff, cost for state-of-the-art medical equipment, malpractice insurance, building maintenance costs, etc, etc).

If progressives really want to see how effective their idea of 'cost controls' work, propose -21% cuts to the salaries of the professors and administrators at the liberal colleges you attended. I'm willing to try that experiment and see of progressive economics can really be effective at 'controlling costs'....

jnc4p: Wyden-Bennett would not have eliminated Medicare. Since the Republicans are now stalwart defenders of Medicare cuts, it is likely most conservative plans would not have eliminated Medicare either. Therefore, there is no alternative where Medicare prices are not set by a centralized bureaucracy. The only question is whether an expert panel (as in the ACA, in 2017) or Congress/lobbyists (current law) propose the prices. Therefore, your post makes little sense, and you sound a bit like the people who complain "Get government out of my Medicare."

dbw1: Most professors I know leave for the private sector to get paid MORE. The market has spoken: our "liberal" professors are underpaid.

bgmma50: The ACA expands insurance access partly through Medicaid and mostly through private insurance. In either case, the providers will continue to respond to market demands as they always have, and purchase new supplies, beds, etc. as they always have, by collecting fees and buying new supplies. More fees from the uninsured = more medical supplies for the uninsured. Markets! The ACA, despite Republican claims, is mostly market-oriented.
This does not apply to supply of physicians, since this is regulated by the AAMC and Medicare payments to teaching hospitals. However, this has always been the case, and it is a matter of debate whether the current supply of physicians is optimal, or whether we can handle more. I would have liked to see the supply expanded, but the ACA did the next best thing: they increased reimbursement for primary care, and put a ton of money into researching new mechanisms for emphasizing primary care. The idea is that it makes no sense to increase physician supply if they're all going to become plastic surgeons - in other words, we have enough docs, we need more primary care docs to handle the influx. I'm sympathetic to this argument, and ultimately, neither you nor I know better than the guys who wrote the bill, and since physician supply is not and never has been based on market demands, nor has anyone, conservatives included, proposed dismantling physician licensing, there's really no argument to be had.

@CarlosXL"jnc4p: Wyden-Bennett would not have eliminated Medicare. Since the Republicans are now stalwart defenders of Medicare cuts, it is likely most conservative plans would not have eliminated Medicare either. Therefore, there is no alternative where Medicare prices are not set by a centralized bureaucracy. The only question is whether an expert panel (as in the ACA, in 2017) or Congress/lobbyists (current law) propose the prices. Therefore, your post makes little sense, and you sound a bit like the people who complain "Get government out of my Medicare." "

I'm not arguing about Medicare per se, but rather that there are two competing approaches to reduce the growth of health care costs.

1. Centralized cost (or if you prefer price) controls set by a government agency such as the Medicare Payment Advisory board that as Ezra notes have the goal of "squeezing providers" to do more with less. This is the approach adopted in the Affordable Care Act to expand the use of Medicare Payment Advisory board cost controls to the entire health care system.

2. Increasing the use of market forces by giving people an incentive to comparison shop on insurance plans and ideally health care itself. Wyden-Bennett would have gone in this direction by opening the exchanges to all people and making it possible for most individuals to replace their employer sponsored health care with individual plans that they pay for themselves. This provides an incentive for the comparison shopping.

By contrast, the ACA attempts to maintain a "firewall" between the existing employer based plans and the new individual exchanges to prevent the government subsidies for the individual plans from undermining the existing employer plans. I don't think this will be successful.

At the most abstract level, this is an argument over whether complex systems such as health care are better managed in a centralized or decentralized fashion. In a democracy with a fiat currency, I believe it's the latter.

CarlosXL:
"and since physician supply is not and never has been based on market demands,"

To embrace this statement, one would have to pretend that there has never been a person who chose to become a physician because of the opportunity for higher wages afforded by the medical profession than could be had pursuing another less-lucrative profession.

As spouse to a highly intelligent and talented person who could have successfully pursued any number of career options, I can say there's at least one more medical practioner in our society because of the 'market demands' that allow medical professionals to command a higher salary than, say, another equally valid and personally rewarding (but less lucrative) profession like teaching.

You seem seems oddly indifferent to the detailed text of the ACA. I never would have guessed that I would ever type that.

Medicare is four programs which are differently squeezable. Plan C (take advantage of Medicare) can be squeezed to death with relatively low costs to anyone but insurance companiies. Plan B can't be squeezed easily. Doctors can and do refuse deal with the CMS. Plan A can be squeezed.

A half hour of googling once, convinced me that at most one hospital ever opted out of Medicare plan A That hospital is not named in something someone wrote on the web 10 years ago but it is obviously the Mayo Clinic. I'm pretty sure that either this was someone confused at the time (by Mayo Clinic staff making excuses for not admitting her) or that it is no longer true.

Many doctors with office practices can keep busy while refusing to see Medicare patients. 0 to 1 hospitals can. Almost any hospital (with one possible exception) which opts out of Medicare will lose a large fraction of its cash flow from one day to the next. I'd guess that it is at least a third for all hospitals (except maybe the Mayo Clinic) and usually more than half. In theory a hospital could gain by doing so by firing half it's staff and renting out spare rooms as apartments. In the real world, it isn't going to happen.

That's why the ACA squeezes Medicare Plan A not Medicare Plan B. The restrictions on the growth of fees are restrictions on payments to hospitals, nursing homes and home health care agencies. The idea is that they won't opt out.

In contrast payments to office practices for ambulatory care will not be squeezed by the ACA. Obama administration officals and congrespersons (or their staffs at least) understood that to squeeze doctors with office practices any more than they are squeezed already, they would have to mandate participation in Medicare.

You seem seems oddly indifferent to the detailed text of the ACA. I never would have guessed that I would ever type that.

Medicare is four programs which are differently squeezable. Plan C (take advantage of Medicare) can be squeezed to death with relatively low costs to anyone but insurance companiies. Plan B can't be squeezed easily. Doctors can and do refuse deal with the CMS. Plan A can be squeezed.

A half hour of googling once, convinced me that at most one hospital ever opted out of Medicare plan A That hospital is not named in something someone wrote on the web 10 years ago but it is obviously the Mayo Clinic. I'm pretty sure that either this was someone confused at the time (by Mayo Clinic staff making excuses for not admitting her) or that it is no longer true.

Many doctors with office practices can keep busy while refusing to see Medicare patients. 0 to 1 hospitals can. Almost any hospital (with one possible exception) which opts out of Medicare will lose a large fraction of its cash flow from one day to the next. I'd guess that it is at least a third for all hospitals (except maybe the Mayo Clinic) and usually more than half. In theory a hospital could gain by doing so by firing half it's staff and renting out spare rooms as apartments. In the real world, it isn't going to happen.

That's why the ACA squeezes Medicare Plan A not Medicare Plan B. The restrictions on the growth of fees are restrictions on payments to hospitals, nursing homes and home health care agencies. The idea is that they won't opt out.

In contrast payments to office practices for ambulatory care will not be squeezed by the ACA. Obama administration officals and congrespersons (or their staffs at least) understood that to squeeze doctors with office practices any more than they are squeezed already, they would have to mandate participation in Medicare.

There are many ways that increased access will decrease costs. Maybe not in the short term but in the long term. I am a physician and I see it all the time.
First, almost everyone gets care here. It is done through ER's which is really expensive and a poor way to get it. The cost of a single ER visit probably is as much as many people would spend in an entire year. I dare you to go to an ER with a headache or dizziiness and NOT get a CT scan. This has been studied and the hit rate for a brain CT with dizziness is basically 0 yet it is the standard. I had a lady in the office recently, she turned 65 and now has medicare. She didn't have healthcare (although could have afforded a basic plan) before retirement and didn't really manager her diabetes. She had heart problems and she says her various surgeries cost 164,000. I imagine that control of her DM and blood pressure in the preceding years might have decreased her needs. The fact is we do a middling job with healthcare for a toop of the line price.
There is plenty of blame to go around for healthcare. I can tell you Drs. don't police themselves. We all know how a not tiny minority game the system. We all know that a Dr. who owns a radiology center order a lot more than one who doesn't. Ditto surgery centers which skim the cream so to speak and I have seen horrible abuses. I recently had a lady who needed ear tubes and she had had this done 3 times in 1 year at a surgery center instead of awake in the office as I had done in the past. She has a cleft palate so will always needs tubes. They were putting in short acting tubes and doing it in their surgery center. There is no question why this was done. i did them in the office for a few hundred dollars. Hospitals have made horrible decisions and they use the reason of "doing a lot of charity care" as why there costs are so high. No one knows hwere that money goes, not even them. It makes no sense that a 15 min tonsillectomy which uses about 300.00 in disposable equipment and 30 to 40 min. of OR time including turn over for the next case costs 5000.00 yet can be done at a surgery center at 1000.00 and still be profitable. Insurance is a joke to. Yeah people are mostly happy until they get sick or get a pre existing condition then realize that it doesn't pay so well. If your insurance pays 80% but you get a cancer diagnosis you are going to have 1000's out of pocket. Lastly, don't give the average american a pass. They are too fat, they eat terribly, they don't exercise (DM, HTN, Sleep apnea, arthritis of the knees, hips and back all are a result of this. They can't come to the decision that care for their 90 y.o. grandma with metastatic cancer to her brain is terminal and want her kept on a ventilator waiting for some miracle.
America needs a health care system and everyone being covered and paying (and even if you are poor, you should pay a certain percentage for care).

Mr. Klein, Your link to a Jacob Hacker white paper sums up your entire post. The belief that government can control costs is ludacris. The graph used is very misleading. Medicare does very little in the world of utilization review and prior authorization. The only change/variation in cost should be administration. If you have a claim that costs $50 to process but the claim cost has increased during that time period from $5,000 to $10,000 then the average cost per participant should decrease dramatically.

Find some concrete evidence that Medicare actually lowers the cost of care. Until then you are no better than any Conservative hollaring about death panels.

You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price check http://ow.ly/3akSX .If you have health insurance and do not care about cost just be happy about it and trust me you are not going to loose anything!

If medicare wasn't present, private insurance for the rest of us would be a whole lot cheaper. by underpaying, medicare distorts the market and forces health care providers to overcharge to recoup their costs. it's like how we all pay for the uninsured to some extent.

Underpaying is not 'controlling costs.' Price fixing is not 'controlling costs'

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